In my previous blog post, I showed that America suffers from “excess spending” in its health care system. Here I will discuss one factor that drives up that spending: indefensibly high administrative costs.

To review: “Excess health spending” in this context refers to the difference between what a country spends per person on health care, and what the country’s gross domestic product per person should predict that that country would spend. (The prediction is based on trends in other countries in the Organization for Economic Cooperation and Development.) The word “excess” here should not be taken as “excessive” unless one could demonstrate that what the other O.E.C.D. nations spend is appropriate and what we spend is ipso facto wasteful.

The United States spends nearly 40 percent more on health care per capita than its G.D.P. per capita would predict. Given the sheer magnitude of the estimated excess spending, it is fair to ask American health care providers what extra benefits the American people receive in return for this enormous extra spending. After all, translated into total dollar spending per year, this excess spending amounted to $570 billion in 2006 and about $650 billion in 2008. The latter figure is over five times the estimated $125 billion or so in additional health spending that would be needed to attain truly universal health insurance coverage in this country.

One thing Americans do buy with this extra spending is an administrative overhead load that is huge by international standards. The McKinsey Global Institute estimated that excess spending on “health administration and insurance” accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003). Brought forward, that 21 percent of excess spending on administration would amount to about $120 billion in 2006 and about $150 billion in 2008. It would have been more than enough to finance universal health insurance this year.

The McKinsey team estimated that about 85 percent of this excess administrative overhead can be attributed to the highly complex private health insurance system in the United States. Product design, underwriting and marketing account for about two-thirds of that total. The remaining 15 percent was attributed to public payers that are not saddled with the high cost of product design, medical underwriting and marketing, and that therefore spend a far smaller fraction of their total spending on administration.

Two studies using more detailed bilateral comparisons of two countries illustrate even more sharply the magnitude of our administrative burden relative to that in other developed countries.

One of these is an earlier McKinsey study explaining the difference in 1990 health spending in West Germany and in the United States. The researchers found that in 1990 Americans received $390 per capita less in actual health care but spent $360 more per capita on administration.

A second, more recent study of administrative costs in the American and Canadian health systems was published in 2003 by Steffie Woolhandler and David Himmelstein in The New England Journal of Medicine in 2003. The study used a measure of administrative costs that includes not only the insurer’s costs, but also the costs borne by employers, health-care providers and governments – but not the value of the time patients spent claiming reimbursement. These authors estimated that in 1999, Americans spent $1,059 per capita on administration compared with only $307 in purchasing power parity dollars (PPP $) spent in Canada.

More and more Americans are being priced out of health care as we know it. The question is how long American health policy makers, and particularly the leaders of our private health insurance, can justify this enormous and costly administrative burden to the American people and to the harried providers of health care.

However, it presumes that health care provider reimbursement will change to eliminate induced demand.

In my view, a much more compelling argument can be made that the fragmented patient care model structure and fee for service provider reimbursement model have much more to do with the exorbitantly high cost of US health care.

I liken this to how the automotive market would function if each consumer, rather than going to a single dealer/manufacturer and buying a whole car, had to purchase each part of the car separately from different suppliers.

I’m waiting for a Henry Ford of the health care industry to emerge with a new transformational business model.

It’s funny how the good doctor now slams the private HMO concept after being one of the early proponents of it but I digress.

Admins costs can you tell lots of things including something positive.

The US does 18,000 transplants a year while a country like Germany does 5,000.

Transplants administration is more costly than many others so could this be one cause of higher admin costs?

Could the higher admin costs allow US to do 18,000 transplants while Germany does only 5,000 because they don’t have the people to administer it?

Doesn’t this mean high admin costs is a good thing ?

Of course we don’t know because none of this data is case mix adjusted by types of services rendered.

Also McKinsey GI report as stated by Dr. Reinhardt as a report on excess administration AND insurance so how much of their estimated $477 billion excess was due to administration and how much due to insurance?

How come this amount this amount gets carried forward and mysteriously converted to all administration excess when Dr. Reinhardt uses estimated of $120 billion excess in ’06 and $150 billion in ’08?

Garth claims that Transplant administration is more costly than others. Why? The medical procedures are more costly, but the administration, marketing, fixed costs, etc. should not change. Why should bill-padding be acceptable in life-and-death situations?

Isn’t wasted money still a part of our GDP? How many people would be thrown out of work if we no longer wasted money paying administrative costs. Marketers (and printers, designers, paper mills), commercial real estate, janitors, human resources professionals would all be out in the cold. Of course, in the long run, universal healthcare would be a subsidy to business, save General Motors, improve productivity… but in the long run, it could be painful.

If garth’s numbers are correct, the number of transplants _per capita_ in Germany and the United States are nearly identical. Higher administrative costs may indeed have some added benefit. But an argument that ignores the relative sizes of the U.S. and German population sure shouldn’t convince anyone.

In fact what it’s showing is that, at least as far as transplants are concerned, ze Germans are getting the same amount of care for far less money.

The comparison that I find most interesting is the juxtaposition between the relative costs of the American system, and the relative health of the populations, not to mention the relative satisfaction with the system, and the relative number of uninsured.

Germany has about 82M people. The US has 300M people. Per capita, that’s about the same number of transplants. Transplants is a bad example anyway, as the availability of organs is the key limiting step.

@Garth: German population is less than 1/3 of American, so 5000 transplants in Germany are roughly equivalent to 18000 in the US.

One major cost in our medical system that nobody is talking about is doctor compensation that is out of whack. In no other area a professional association is allowed to regulate the number of practitioners of their profession in the country, yet the American Medical Association limits the number of residencies in US teaching hospitals to make sure that there is always a shortage of doctors and hence sky-high compensation, that can be up to three times of that in Europe.

@garth (#2): The population of Germany is 82 million while that of the USA is 300 million. Therefore the 18000/5000 ratio of US transplants to German transplants is exactly that predicted by population alone.

If the US does 18000 transplants a year, and Germany does 5,000, then Germany is actually doing slightly MORE transplants per person than the United States is: their population is about 82 million, while ours is 300 million.

I am no mathematical whiz, but it seems that if your numbers of 5,000 transplants in Germany and 18,000 transplants in the U.S. are correct, you would still have to check the population of each nation to see if in the U.S. we are indeed doing more for the people in our country. A quick google search shows that Germany as 82 million (2007 data) and the U.S. 300 million.

Then it is easy to see that the U.S. and Germany have about the same number of transplants per population (i.e. since U.S. has 3.6x Germany’s population, then the U.S. provides 3.6x the number of transplants).

So your example actually proves Dr. Reinhardt’s point: the U.S. and Germany have an equivalent # of transplants per population, but the U.S. spends quite a bit more, and these costs seem to be administrative.

Speaking from a physician’s standpoint, I can tell you that physicians’ incomes have been dropping since the 1980’s, so the increase in health care costs can easily be pointed to: insurance providers and pharmaceutical companies. Everyone knows this, but this being the U.S., it seems that no one wants to tackle it until a true crisis occurs. Our current economic predicament exemplifies this ‘head in the sand’ attitude. I hope that we, as citizens of arguably the best country in the world, can do better.

Were more americans aware of these figures, there would be more pressure on congress too pass single payer healthcare for everyone, medicare for all. It’s my understanding that the health insurers are in that business to make a profit. Let’s all question the premise for a moment: Is there something fundamentally corrupt (and corrupting) about companies whose sole purpose is to maximize profits, i.e., to deny coverage, at the expense of the person seeking decent healthcare? Wake up, Congress. Cast those health insurers out in the cold where they belong.

Garth, you have to adjust the number of transplants for the size of the population (USA about 300 M, Germany about 80M) as well as the waiting lists, i.e.: need for transplants vs. completed ones. Germany has universal coverage, i. e.: everybody who is eligible for a transplant gets in the waiting list. Here, uninsured people just do not even get in the list (see Steffie Woolhandler”s Harvard study where she shows that uninsured are 18% of donors but 0.8% of recipients. USA administrative overhead is higher not only in absolute but in relative (percentage of health care expenditure) basis.

Illustrating Dr. Reinhardt’s point are the administrative costs of getting a simple outpatient blood test. Before the blood gets drawn, a clerk requires about 15 minutes to get the consent and privacy notification documents together for me to sign plus generate the lab slips.

Nevertheless the critical factors in America’s high health care costs are (1) Politicians oblige American voters demand for the best care (2) Obesity and substance abuse associated medical problems are health care budget busters and (3) the heath system is drowning financially paying for the care of insured illegal immigrants working off the books.

Bravo Dr. Reinhardt! At our hospital, as costs rise, we cut services, put unrealistic expectations on our providers (doctors, nurses, nurse practioners and etc). And while quaility goes down and the cost goes up. Our hospital adminstrators drive away in their BMW’s and our peditrician is woundering if she can stretch her pay check to pay her mortage and her medical school bills.

It is nothing short of immoral that so much money should be wasted on administration when sick people go without care, doctors can’t collect their fees, and hospitals go bankrupt.

Let’s examine this statement: “Product design, underwriting and marketing account for about two-thirds of that total.” Well, “product design” is the work of figuring out what services should be included or excluded from health care policies. “Underwriting” is deciding who gets covered, and who gets denied. “Marketing” is selling competing health plans to employers and individuals. None of this $150 billion expenditure has anything to do with providing medical care.

And this doesn’t even count the costs of paperwork, the thousands of call center reps whose job is to explain to you why your treatment isn’t covered, the very nice salaries of health insurance company executives, and their profits.

When will we wake up and refuse to pay anything for health care that isn’t directly related to actual medical care?

in fairness to private insurance overhead I notice in my practice that the private insurance patients are moved along in their hospitalizations more efficiently than Medicare or Medicade patients. The cost containment function they provide seems to be replaced in other single payer systems by triage by wait list. Give the devil his due.

It never ceases to amaze me, the amount of energy that can go into a project just to avoid doing the right thing. The best, simplest, least costly, most effective thing we could do is expand what has been working so well for years, Medicare. You get sick, you get care, and the caregiver gets paid. Nothing could be simpler.

The proposal exists, HR676 by John Conyers, just needs to be passed and signed. We don’t need Kennedy or Baucus, let’s just DO IT.

This would bail out 100% of our corporations, not just a few, and to the tune of $6000 per employee per year. If the taxpayers are going to spend $700 billion, let it benefit the country!

We’ll soon find out if the Dems are also in the pockets of the insurance industry.

The hospitals are driving the cost problem. Until we address this, we are just arranging deck chairs on the Titanic. What other business gets 9+% more revenue every year, charge what they want, manage huge endowments, plus spend excessive amounts of money on real estate to attract physicians, all the while claiming poverty? Routine procedures can cost $50,000! Why? Whats the justification? There isn’t one.

The Affordable Care Act imposes economic burdens that are the equivalent of taxes, an economist writes. Read more…

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